PEER COMPANIES

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PEER COMPANIES

There is a bit of hope trade in the pharma sector but there are good chances that some of the marquee names could deliver reasonable returns over the next six months, says Naveen Kulkarni, Head of Research, Reliance Securities. Excerpts from an interview with ETNOW.

After ICICI Bank’s stupendous performance, can Axis Bank match up today?The expectations even from Axis Bank are quite high. The NII growth is expected to be in the range of around 17-18% and profit in the range of around Rs 1,700 crore and that is what we are expecting. Slippages should be similar to what they were in the previous quarter but that is the key number to look at in this quarter. We have had some bit of downgrades that happened during the quarter and that will be the number that the market will be very much focussed upon -- the slippage number and the asset quality challenges that the industry is facing. Whether Axis can deliver something similar to ICICI Bank is something which the market will be very very watchful about.

In case you are tracking Strides Pharma, it is up about 10% in trade today. The pharma story has been incredibly stock specific. Where would you look to invest in pharma -- more domestic oriented names or specific midcaps?If we look at pharma as a pack, the companies which have a higher exposure to domestic businesses, are a safe bet. That has been the investment theme for the last one year. The likes of let us say an Alchem or a Torrent have been much better investment candidates than the companies which have a much greater US exposure, but having said that what is happening now is that the base has become favourable for a lot of companies like Sun Pharma.

There are factors which should start working for the Indian pharma industry, especially in the specialty space. Those are the factors that the market is starting to focus upon and of course there are challenges with regards to options. There is a bit of hope trade in the pharma sector but there are good chances that some of the marquee names could deliver reasonable returns over the next six months.

What is your view on the overall fund flow given that we have seen a massive FII exodus? We have been talking about not just the FPI taxation issue but also slowing growth. Is this going to remain a lingering concern? Are the FIIs going to search for better havens within the emerging market basket?Yes. One is the taxation issue. That taxation issue is not going to go away so easily, unless and until some change is made by the government. This aspect is quite tricky in terms of where the foreign institutional investors will start finding comfort in terms of valuation and the growth which will essentially offset the increase in the burden of taxation. So, that is one aspect. There is no clear cut answer to the amount of FIIs selling which can take place. Apart from that, growth is definitely a concern now. There is of course a bit of challenge which we are clearly witnessing in terms of base effect also because the previous two years, the base has gotten normalised and now with the base being quite elevated, the growth numbers have started to look optically weaker. So, that is another challenge that we are witnessing.

But the base effect also starts receding in forthcoming quarters like Q3 and Q4 in some of the sectors like auto. It is going to be a mixed bag in terms of the growth challenges that we are going to witness from here on, but the next three months clearly look to be challenging both from an FII outflow perspective as well as economic growth perspective. These are the two challenges which are very evident and they are going to put a lot of pressure on the markets.

Hero result will be out today. We have not seen anything encouraging coming out of Bajaj. We have seen that pressure continue. What are you anticipating from Hero or from some of the remaining auto names that we are still expecting to deliver?From Hero we are not expecting anything great. The volume numbers are down by almost 11% for this quarter. There has been 4-4.5% improvement in pricing. But revenues are still going to be down for Hero Motors because of negative operating leverage. The EBITDA numbers are going to be further down. We are looking at 18-19% decline in EBITDA and 16-17% decline in earnings. So we are not expecting anything great from Hero.

Sequentially we are looking at 3% to 4% improvement in earnings for Hero Motors. So we will have to wait and watch about what the management commentary will be in terms of inventory levels, what they are seeing in the market and whether things could improve maybe three months from now. Those are the aspects the market will be focussed upon but as of now from this quarter numbers I think it is still going to be a wash out quarter.

About Eicher given that we are also going to be expecting those numbers tomorrow?We do not track Eicher Motors that closely but considering the way the auto numbers have been, I do not think any of the auto companies are reporting any great set of numbers. The auto pack has been quite weak. Again, volumes numbers are out and the focus tends to be on margin and management commentary on their outlook. We will have to wait and watch on these aspects and those are the more qualitative aspects that the market will be focussed upon.

When it comes to the oil marketing companies, what is your expectation from the likes of IOC and HPCL? Do you believe that with the volatility in crude oil prices, one would be a little bit cautious here as well?Yes. This quarter, there are inventory losses and the overall numbers may not be encouraging but again we will have to wait and watch on some of the other aspects also for the oil marketing companies in terms of their gross margins.

Those aspects we will have to focus upon as of now but as of now. I do not think the oil marketing companies are going to report any great numbers.